Increasing your prices without losing customers

At the 2010 Virginia Council of CEOs annual Retreat, we heard how coming inflation and an improving economy makes this the right time to increase prices. But how do businesses in Richmond do so without losing customers?

Costs are going up, so plan your pricing

Inflation will come into play over the next few years and that means your costs will be going up. Assuming the CPI will hit 3% in 2011 and 6% the following year, what will your prices need to be to keep up? Your staff will need some kind of additional compensation at the same time your buying power is impacted, so you need to plan what your prices should be. Once you know where they need to be, you can plan how to get there and how to convey the change to existing clients.

Is there something more you add? Or subtract?

Vendors are often reluctant to increase prices and many of us have held off pricing increases so any change will be new or unexpected. Is there something you can add to what you are delivering, something that helps relieve a customer problem or meets another customer desire? Adding value to your current product or service can help ease the price increase.

If you are currently selling bundles or packages, you could break those bundles out so customers could choose which they want and those they don’t really need. Beer lovers with a beer budget don’t need or want champagne. Unbundling is one way to keep the total cost to the customer acceptable, lower your costs, and charge a premium for what they really want or need.

Will your customers stay with you?

The ultimate fear with a price increase is that you may lose too many customers or lose the most profitable ones. It’s nearly impossible to ask a customer “how much more can I charge you?”, but it is important to know that your customers will stick with you after a price change.

You may be in a dangerous position and be counting on Fred Reichheld calls “bad profits”. In his book, The Ultimate Question: Driving Good Profits and True Growth he makes the case for “good profits” versus “bad profits”. Good profits are those that come from customers who genuinely love your company, brand or services. They will continue to buy from you and recommend you to others even when you increase your prices.

However, Reichheld warns that you should be wary of bad profits. These are profits from customers that, given a better deal or better terms or even just a whim, would jump ship and buy elsewhere. It is these customers you need to know about before making a pricing change.

You can use Reichheld’s Net promoter Score to determine how much of your current customer base is likely to leave if you increase prices. Read his book and have your marketing department survey your customers. If you can’t spare the time but still need to know which are good profits, have AdLinea create an online web survey and email campaign to your customers to determine the Net promoter Score NPS.

When is the right time?

Look at what new products you plan to release in the next 12 months, what changes to your services or your bundles you are planning, or what time of year would be best for changing product bundles or service prices. Plan to have the changes in place well before any critical seasonal times.

How do you tell the customers?

One way or another you’ll need to announce the price change to your customers. Some industries and transaction volumes are such that simply including a notice in a bill is sufficient. For businesses where the relationship with customers is high touch or long term, more notice and more direct, personal contact may be the right way to go.

Alan Beaulieu and Jay Goltz both had recommendations for dealing with telling the customers. The one I found especially useful was when you have a great long-term customer and you don’t think the sudden price change will go well. The suggestion was to talk to them directly, explain the need for the price change, reference the long relationship and ask to increase the price slowly for that one client to minimize its impact.

For the normal customers, a phone call or letter should be enough. Here are some examples across several industries and situations:

Phone call #1

The reason I’m calling is to discuss our services for you over the upcoming season. We do our best to keep our prices reasonable and we have held off any kind of increase due to the economy over the last two years. Even though we’ve kept your prices the same, our costs have increased and now we have to raise our prices 15%. I wanted to call you personally and let you know you have been a great client over the years and we are making an exception for you and only increasing your price 7%. Your price has been $450 for the past three years, our new price will be $520, but we are keeping your price down to $480.

Letter #1

Due to the increase in our costs, we must raise the cost to you so we can continue to provide the quality and service you’ve come to expect. We have avoided raising our prices for as long as possible, but we can no longer prolong the inevitable.

The new price list is attached for your review and goes into effect on [date]. We will honor the current prices for any orders placed between now and [date of increase] so you can take advantage of them before the price increase.

We thank you for your business and appreciate your understanding the necessity for this price increase.

Announcement #1

Good news! We’re continuing to hold down costs for you!

Price changes since 2007:

40% increase on price of housing

110% increase on cost of medical insurance

35% increase on [other products they buy]

Just 15% on [your product]

Letter #2

My new rates go into effect as of January 2011 (I wanted to give you some time to adjust). I will be offering a discount to customers who sign up for regularly-scheduled cleaning. The new prices will be:

Weekly cleaning (year-round – 42 week minimum commitment): $80 per visit

Single “start of season” full house clean: $125

End of season “close the house down special”: $125

Monthly cleaning:

3 month commitment: (1 visit per month): $90/visit

6 month commitment: (1 visit per month): $85/visit

Please mark your calendars so you’re not surprised by the new rate! I look forward to continuing to work with you.

Letter #3

We regret that rising costs for raw materials necessitate our raising the price of all footwear 10%, effective September 1. We have made every attempt to avoid the increase, but we refuse to compromise on quality. This is our only recourse. We think you will agree that the quality of Shell shoes should not be sacrificed. We look forward to another year of association with you.

Letter #4

The price of diesel fuel for our delivery trucks will rise approximately $3 a gallon this fall. That and the higher cost of corn syrup in our soda drinks has forced this increase. Our competition will have to make similar increases, but we’ll still deliver better service. We appreciate your past patronage and look forward to serving your future refreshment needs.

Phone call #2

We are notifying our best customers of an upcoming price change. It is just a slight rate adjustment, due to the Consumer Price Index changes and increased transportation costs over the last twelve months, and it will go into effect on March 1.

We have been investing in efficient equipment and improved technology and that helps us keep rate increases at a minimum, today and in the future. We anticipate no additional rate adjustments for the next full year.

What if we cannot increase prices?

There are other ways to endure your costs increasing if you find price increases are impossible.

  • Get paid sooner as anything that accelerates cash flow has the same net effect as a price increase. Send out invoices earlier, set terms to net 15, or offer early bird discounts.
  • Reduce or eliminate discounts. Count the number of transactions at various price levels and make adjustments if 50% or more of your deals are discounted.
  • Improve customer loyalty and develop a relationship or annuity model. Sell upgrades and add-ons to loyal customers and they will buy more annually.
  • Sell a complete, packaged deal. Include everything that the customer could possibly need, add value and service and you can command a higher price.
  • Remove high-cost components. For customers with limited budgets, remove the labor-intensive highest cost items from your regular product and offer them separately.

So, we know pricing increases are coming and we are headed into a recovery and growth phase. The best path forward is understanding what to increase, planning the changes and announcing it to customers. Make sure you are surveying the competition and the customers and using marketing advice and communications to implement the increase without jeopardizing your business.

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2 Responses to “Increasing your prices without losing customers”

  1. Randy Wyckoff Says:

    In the spirit of experience sharing. My favorite quote is “Charmin is the most expensive toilet paper and there isn’t a shred of evidence that it does a better job”.
    What I have learned about the issue.
    1. Be careful about explaining price increases based on cost increases. The customer could generally care less about your costs. They are your problem and the customers expect you to be as diligent about reducing them as they are.
    2. In many instances, your price is reflection of the value that your product or service provides. You need to make sure that you are, in fact, a clearly defined value provider (better service, more knowledgable, more products,etc.) before increasing prices.
    2. Only notify those that are affected. there’s no reason to arouse your entire customer base if only a percentage are affected.
    3. Make sure that your entire organization, particularly sales and customer service staff, understands the rationale behind your increase – and the message to the customer. They will be on the front line and need to feel confident that they are prepared to take the heat.
    4. Be resolute, there will always be customers who push back hard to get the “old” price. Once you cave on one, you lose both the internal and external battles.

  2. Larry Ragland Says:

    Nice post, Doug. Good job of consolidating several helpful tips on planning for and executing price increases. The only thing I see that I take issue with is your point on reducing AR days as having the same net effect as increasing prices. While reducing AR days is a terrific tool and adds greatly to the fiscal health of the company and to available cash, it’s still not the same thing as protecting your margins. Two key points—first, the time value of money right now is nearly zero, from a banking perspective. Secondly, if you sell a $100 item with a $50 cost, whether you collect today, tomorrow, or next month, you’re still only going to have $50 in profit.

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